Citigroup Ex-CEO Pandit Invests in CommonBond

Sept. 4 (Bloomberg) -- CommonBond Inc., an online provider
of student loans, raised more than $100 million from investors
including former Citigroup Inc. Chief Executive Officer Vikram
Pandit to help more graduates reduce their debt loads.

Tribeca Venture Partners and Social+Capital Partnership led
the financing, which consists of equity and debt, CommonBond CEO
David Klein said in an interview. The startup is going after
students and graduates from 20 business schools by offering
lower-cost loans than those from private lenders or the
government.

“Financial institutions, which are supposed to
appropriately price risk, are charging outlandishly high rates
to credit-worthy borrowers,” said Klein, 33, who co-founded the
New York-based company in 2011.

CommonBond and Social Finance Inc., or SoFi, are among a
growing crop of startups trying to displace banks and
traditional loan providers by providing cheaper rates for
borrowers and letting individuals serve as lenders and
investors. LendingClub Corp. and Prosper Marketplace Inc.
pioneered the model -- known as peer-to-peer lending -- with a
focus on consolidating high-priced credit-card debt into cheaper
three-year and five-year loans available online.

With the financing, CommonBond’s 10-person team will be
able to issue loans to 1,500 borrowers over the next six months
to a year, Klein said. He declined to comment on the company’s
valuation. CommonBond is smaller than San Francisco-based SoFi,
which may originate as much as $1 billion in loans this year to
graduates from about 100 schools.

Borrower Rates

Both companies raise funds from alumni of each university
they work with, turning the individual lenders into investors.
Klein says investors can expect annual returns of 4 percent to 6
percent, a rate that exceeds yields on 10-year Treasuries,
savings accounts or certificates of deposit.

CommonBond promotes annualized percentage rates for
borrowers on its site for 10-year loans of 6.4 percent, compared
with 6.89 percent for federal PLUS loans.

President Barack Obama signed legislation last month
linking student-loan interest rates to financial markets,
setting rates for Stafford loans for graduate students at 5.41
percent for the 2013-2014 academic year and PLUS loans at 6.41
percent.

90 Percent

Enactment of the new law, designed to provide certainty to
students who rely on government loans, ends two straight years
of political skirmishing in Congress over the rate for
subsidized Stafford loans.

Even with the more competitive government rates, Klein said
his business isn’t threatened because those loans are only
available for existing students and not graduates. That means
the change doesn’t address 90 percent of student debt
outstanding, he said.

“It’s that part of the market where we have the
opportunity to provide a superior product,” he said.

CommonBond’s financing also included participation from
former Thomson Reuters Corp. CEO Thomas Glocer and ex-Barclays
Plc executive Tom Kalaris. In November, the company raised $3.5
million, with $1 million from a private investor and the rest
from alumni.

Fee Revenue

CommonBond makes money by taking an origination and
servicing fee on every loan. While Klein declined to disclose
the size of the fee, LendingClub generates revenue of about 5
percent on its loans.

Peer-to-peer lending “opens up whole areas of finance that
were no-go areas before,” said Glocer, who is also an investor
in LendingClub. “For the number of people with capital that are
getting nothing in traditional savings or time deposits, it’s
created a really interesting asset class.”

The schools CommonBond serves include Klein’s alma mater of
the University of Pennsylvania’s Wharton School, as well as
Harvard Business School, Stanford Graduate School of Business
and the University of California at Berkeley’s Haas School of
Business.

The maximum loan available for graduate refinancing is
$220,000, and for current students it’s the cost of attendance.